1. Presentation Prepared for the Appropriations Committee and the Finance, Revenue, and Bonding Committee by the Office of Policy and Management November 27, 2006

2. 2 One of the greatest pieces of economic wisdom is to know what you do not know. - John Kenneth Galbraith

3. 3 ECONOMIC INDICATORS ASSUMPTIONS USED TO DEVELOP REVENUE ESTIMATES

4. 4 SIGNIFICANT DEMOGRAPHIC TRENDS Projections of The Population in Connecticut (Mid-Year Resident Population In Thousands)

5. 5 DEMOGRAPHIC TRENDS

6. 6 Beware of little expenses; a small leak will sink a great ship. - Benjamin Franklin

7. 7 BUDGET PROJECTIONS Expenditures grew dramatically in fiscal 2006 and are projected to rise significantly in fiscal 2008 The general fund is projected to register deficits beginning in FY 2008, if spending is left unchecked The income tax is projected to yield modest steady growth after a four fiscal year growth in estimates and final payments of over 97% Sales tax collections are forecasted to remain relatively stable (11.7% over projection period)

8. 8 BUDGET GROWTH RATES GENERAL FUND BUDGET GROWTH RATES

9. 9 PROJECTED BALANCE OF THE GENERAL FUND STATE OF CONNECTICUT General Fund Surplus/(Deficit) Note: Fiscal years 2008-2010 assume appropriations prior to reductions required by the Constitutional expenditure cap.

10. 10 In the end it's a revenue stream. And all revenue streams eventually reach the sea. - Paul Schrader

11. 11 PERSONAL INCOME TAX Economic Growth Rates of the Personal Income Tax

12. 12 Estimates and Finals Component of the Personal Income Tax (in millions)

13. 13 ESTIMATES AND FINAL PAYMENTS P.I. Tax Growth Rates For Selected Months Fiscal Years 2005-2007 ESTIMATED PAYMENTS FINAL PAYMENTS

14. 14 SALES AND USE TAX ECONOMIC GROWTH RATES OF THE SALES AND USE TAX

15. 15 Balancing the budget is like going to heaven. Everybody wants to do it, but nobody wants to do what you have to do to get there. - Phil Gramm, Senator, TX

16. 16 STATES WITH BUDGET RESERVE FUNDS

17. 17 BUDGET RESERVE FUND BALANCE BUDGET RESERVE FUND

18. 18 Balancing the State Budget During the FY02 & FY03 Economic Downturn Required the Following Actions

19. 19 BUDGET RESERVE FUND SHORTFALL BUDGET RESERVE FUND AMOUNT BELOW TARGET

20. 20 Always do right. This will gratify some and astonish the rest. -Mark Twain

21. 21 ORIGIN OF THE EXPENDITURE CAP GROWTH IN STATE SPENDING

22. 22 THE EXPENDITURE CAP – AN EFFECTIVE TOOL USE OF GENERAL FUND SURPLUSES FY1996 to FY 2006

23. 23 A billion here, a billion there, pretty soon it adds up to real money. - Senator Everett Dirksen

24. 24 STRUCTURAL HOLES CREATED BY FUNDING ONGOING EXPENDITURES WITH PRIOR YEAR SURPLUSES IMPACT ON FISCAL 2008 - GENERAL FUND (IN MILLIONS)

25. 25 DEPARTMENT OF CHILDREN AND FAMILIES DCF EXPENDITURES (In Millions)

26. 26 DEPARTMENT OF EDUCATION DEPARTMENT OF EDUCATION GRANTS (In Millions) Note: Figures provided for FY02 – 05 are revenue based (not entitlement based) in that they include prior year adjustments.

27. 27 DEPARTMENT OF MENTAL RETARDATION DMR EXPENDITURES (IN MILLIONS)

28. 28 INCREASING PHARMACY EXPENDITURES (IN MILLIONS)

29. 29 MEDICARE PART D Medicaid Clawback Eligibility Manufacturers Rebate ConnPACE Medicare Part D Supplemental Needs Fund State Employee Subsidy

30. 30 SUMMARY OF LOCAL AID ESTIMATED FORMULA GRANTS TO MUNICIPALITIES (IN MILLIONS)

31. 31 A balanced budget takes us in the right direction. Clearly, adding billions and trillions of dollars to our debt takes us in the wrong direction. - Tim Johnson, Representative, IL

32. 32 DEBT BURDEN COMPARISON

33. 33 IMPACT OF DEBT EXPENSES GENERAL FUND DEBT SERVICE EXPENDITURES

34. 34

35. 35 PROJECTED GENERAL OBLIGATION BOND ALLOCATIONS

36. 36 ACTUAL & PROJECTED GENERAL OBLIGATION BOND COMMISSION ALLOCATIONS

37. 37 DISTRIBUTION OF GO BOND FUND ALLOCATIONS ACTUAL FY2002 - FY2006 PROJECTED FY2007 - FY2011

38. 38 "Zeroes are important. - Denis Hayes, author and contributor to Starbucks the way I see it

39. 39 LONG-TERM OBLIGATIONS The states long-term obligations total $50.0 billion. This equates to approximately $14,280 for every man, woman and child in Connecticut In comparison, total Personal Income Tax collections in FY07 will only be $ 6.625 billion. * Actuarial valuation for fiscal year 2006 released on 11/16/2006.

40. 40 UNFUNDED PENSIONS STATE EMPLOYEES RETIREMENT SYSTEM AS OF 6/30

41. 41 STATE EMPLOYEES RETIREMENT SYSTEM CONTRIBUTIONS CONTRIBUTIONS TO THE STATE EMPLOYEES RETIREMENT SYSTEM Millions

42. 42 STATE EMPLOYEES PENSION & HEALTH INSURANCE – ALL FUNDS SERS & HEALTH INSURANCE EXPENDITURES As Of 6/30

43. 43 UNFUNDED PENSIONS CONNECTICUT TEACHERS RETIREMENT SYSTEM TEACHERS RETIREMENT SYSTEM AS OF 6/30

44. 44 UNFUNDED PENSIONS TEACHERS RETIREMENT SYSTEM CONTRIBUTIONS

45. 45 SCARCE DISCRETIONARY SPENDING ROOM

46. 46 2005 STATE RETIREMENT SYSTEM STATISTICS STATE EMPLOYEE AND TEACHERS SYSTEM COMBINED

47. 47 OTHER POST EMPLOYMENT BENEFITS The Governmental Accounting Standards Board (GASB) requires large employers, such as the State of Connecticut, to quantify the amount of non-pension retirement benefits offered to employees beginning in fiscal year 2008 Connecticuts substantial health benefit package results in a significant unfunded liability. Preliminary estimates of this unfunded liability are most likely to exceed the liabilities of the unfunded liabilities of SERS and TERS combined Connecticuts unfunded liability may place the state at a disadvantage relative to other states that have a much lower unfunded liability or have undertaken a plan to address such shortfalls Connecticut will also have to quantify the amount of non-pension retirement benefits offered for Teachers Estimated medical and dental actuarial accrued liability ranges from $8.4 billion (advance-funded basis) to $21.1 billion (unfunded basis) Other Post Employment Benefits for State employees are governed by an agreement with the State Employees Bargaining Agent Coalition (SEBAC) on pension and healthcare benefits that extends to 2017; changes can occur only if the State and SEBAC agree to reopen the agreement, or via arbitration

48. 48 RISING ENERGY COSTS (1) Final FY2006 expenditures are not yet available; the amounts shown above may not agree with official figures to be published in the Comptroller's Annual Report (2) Includes $4,425,000 in unpaid bills attributable to FY2005 operations (3) Figures from agency FY2007 - FY2009 Current Service Budget Requests (4) $10M available in OPM Energy Contingency account to meet agency needs GENERAL & SPECIAL TRANSPORTATION FUNDS (IN MILLIONS)

49. 49

50. 50 SUMMARY The state is projected to experience a surplus at the end of FY2006-07. Projected spending will exceed available room under the expenditure cap in fiscal years 2007-08 and forward if spending is left unchecked. Beginning in fiscal year 2007-08 the state will experience significant deficits if spending remains unchecked. Debt service as a percent of budget expenditures will continue to grow despite maintaining general obligation allocations and issuances fixed at the current level. In order to achieve a significant reduction in debt service as a percent of budget expenditures, reductions in bond issuances would be required. Energy costs have risen almost 100% between FY 2000 and FY2007. Major issues and trends impacting the states fiscal situation include: Pharmacy costs, personnel costs, retirement benefits, expenditures related to the Department of Children and Families, the Department of Correction, Department of Education, and Department of Mental Retardation. The state faces significant long-term obligations including debt, unfunded pension liabilities and unfunded post-employment retirement benefits. The ability of the State to deal with unfunded liabilities will become increasingly difficult due to a demographic deficit – CTs median age increases 10% through 2030, with significant growth in age groups over 65.